Treasurers are finding that their role in their organisation’s ESG strategy is increasing, and in turn, so is their focus on sustainability. A sustainable treasury doesn’t simply mean cutting out paper-based processes – though that can certainly be part of it. Instead, through the likes of sustainability-linked loans and thematic bonds (green bonds, gender bonds, water bonds, for example), treasurers are able to help steer their organisations towards a more sustainable future through one of their core functions: finance.
It’s not just green bonds
As of June 2019, according to Bloomberg, green finance is worth over US$31trn – and showing no signs of slowing down. Looking at that figure more holistically, it may seem small. Indeed, uptake of green finance options has been slower than some experts are happy with. According to data released in October 2019 by the World Resources Institute, just 25 of the world’s largest 50 banks have made public sustainable finance commitments.
The same report found that even among the banks with active commitments, “the average annual level of fossil fuel finance from 2016-2018 is nearly twice the annualised amount of sustainable finance commitments. Only seven banks have annualised sustainable finance targets greater than the amount of finance they provide for fossil fuel-related transactions each year.”
From this data alone, it’s clear that businesses must do more to initiate sustainable financing themselves, but many aren’t aware of all the available options. Treasurers often hear primarily about green bonds or linked loans, but as has been previously noted, the demand for green bonds unfortunately far exceeds the supply.
For Leonie Schreve, Global Head of Sustainable Finance at ING Bank, the answer may instead lie in green loans and sustainability-linked bonds. “Green loans are very closely related to green bonds, and a sustainability-linked bond is a copy of the sustainability-linked loan, where you actively support clients in their sustainable transition,” she says.
Heather Lang, Executive Director, Sustainable Finance at Sustainalytics agrees. “Green bonds and linked loans are the two major pillars, but we’ve seen a fair bit of diversity within those pillars,” she says. “We also expect to see transition financing (transition bonds) becoming a hot topic in 2020, expanding beyond projects that would already be considered green by definition to include assets and industries that are looking to transition to a low carbon economy. This will promote entry for a lot of different industry players that haven’t been part of the green bond market in the past.”
Schreve adds that a new product was launched by ING last year: the sustainability-linked derivative. She explains that this is the same concept as a sustainability-linked loan, but also enables treasurers to fully integrate their sustainability target into all their financing streams – not only in the loans but also in the derivative.
There is also more diversification in loans, explains Lang. “You have green use of proceeds loans, where the loan would finance projects or assets defined as ‘green’ or ‘sustainable’.” There are also general-purpose loans, which could be syndicated loans or revolving credit facilities, that would link the interest rates of loans to sustainability performance targets.
Going green by going paperless
Having a sustainable treasury doesn’t have to be limited to just finance though. Digitalisation, for example, can help a company go paperless and thus improve its sustainability agenda. The blockchain space is one that is rapidly expanding and has the potential to revolutionise trade documentation.
Blockchain providers don’t just hope to make trade easier, by digitalising unwieldy bills of lading and letters of credit, but in making everything paperless, the industry could save US$400-600bn per year, according to Bain & Company. Shipping giant Maersk took part in a proof of concept in 2016, exploring the use of blockchain to digitalise traditional bills of lading. It found that a simple shipment of roses from Kenya to Rotterdam generated a paper pile that measured 25cm high. Meanwhile, the International Chamber of Commerce (ICC) estimates that trade generates around four billion pages of paper documents per year.